Confirming the Rent Roll
In many of the smaller markets throughout the country, there are a lot of first time commercial real estate buyers. The St. George, UT Commercial Real Estate Market sees many of these buyers, and there are things that every buyer should consider.
When purchasing a residential home, whether it is for personal use or as an investment, the thought process is typically what kind of neighborhood is it in, how close is it to schools, shopping, churches, parks, etc..
Although some of those factors apply when purchasing a commercial investment, I would say that that confirming the rent roll may be one of the most items. In many cases, investors aren’t really purchasing a building and land, they are purchasing the income.
If you are using a lender, they will likely require a lot items to provide checks and balances. When purchasing with cash, you should be as tedious as a lender is, and make sure you go through the same checks and balances. Unfortunately, you may be sold a lot of “Blue Sky” with a tenant that has a 5 year lease in place, but if you don’t review all the documents, you might miss the fact that they have a 30 day out clause, allowing them to cancel the lease whenever they wanted to.
Some key items to look for is:
Size of Building and Land: Make sure that the size of the land and the building matches up with the county records. Also, make sure the suite sizes align with what are in the current leases.
Tenant Name: Make sure the name on the rent rolls line up with the names on the leases. If not, there may be a missing addendum which could contain critical information that you may overlook.
Rent Terms and Escalations: The last thing you want to do is purchase a building, and find out that the tenant/tenants are moving out shortly.
Face to Face with Tenants: One of the best ways to get an idea of how a tenant is performing, is to have a face to face with them. Don’t be worried about asking hard questions, like “How is business, do you like this location, do you have plans to move somewhere else when the lease expires?” The rent roll may tell you that the lease expires in 3 years, but a face to face may tell you that their company is going out of business soon, and you should be aware of that.
Operating Expenses: Confirm, Confirm, Confirm. Take a look at as many trailing years as they will give you. Don’t trust a pro forma provided to you by someone who is trying to make the property look as good as possible. You may see very little expenses for a couple of years, but a property inspection show you that it’s because they haven’t repaired the AC units in 4 years, or the asphalt has been neglected and needs to be resurfaced.
Trust your gut. If you read something in the pro forma, or see something in the marketing that doesn’t seem right, don’t be afraid to dig into